Despite inklings of a market broadening in the fourth quarter sparked by Donald Trump’s election victory and further interest rate cuts from the Federal Reserve, the post-election rally proved short-lived and momentum-led with relatively narrow leadership. The S&P 500 Index (SP500)(SPX) advanced 2.41% in the quarter to finish 2024 up 25.02%, completing the best back-to-back years for the index since 1998. The benchmark Russell 1000 Growth Index (RLG) jumped 7.07% for the quarter and 33.36% for the year, easily outdistancing all other parts of the U.S. equity market.
While small cap, value and cyclical shares were bid up in the aftermath of Trump’s win, which included a Republican sweep of Congress, growth stocks reasserted control by quarter’s end. The RLG topped the Russell 1000 Value Index by 905 basis points for the quarter and 1,900 bps for the year while the Russell Midcap Growth Index was the best quarterly performer overall, rising 8.14%.
As they have done for most of the last several years, the Magnificent Seven dominated broad market returns, accounting for 74% of the RLG’s performance in the quarter and 68% for the year. Nvidia (NVDA) continued to ride the momentum of its leading position as the key supplier of chips for AI applications, rising more than 170% in 2024, while Tesla (TSLA) roared back in the fourth quarter on strong financial results and the coattails of Elon Musk’s close association with the incoming Trump administration. Meanwhile, most gauges of investor sentiment, including the Investors Intelligence Bull/Bear Ratio, Citigroup’s (C) Panic-Euphoria model, as well as current put/call ratios, show elevated levels of bullishness (Exhibit 1).
Exhibit 1: Market Optimism Elevated
The ClearBridge Large Cap Growth Strategy carefully manages its mega cap exposure to promote diversification, control risk and promote long-term consistency. We have always said it would be difficult to keep pace in a high-beta market when the index is up 30%. While strong stock selection enabled the Strategy to outpace the RLG in 2023, the offensive market posture and continued historical levels of market concentration for the Magnificent Seven were headwinds to our diversified approach, most notably in the fourth quarter.
For the quarter, our portfolio overweight in health care, an underweight position in Tesla and lack of exposure to Broadcom (AVGO) drove the majority of relative underperformance versus the index. Throughout 2024, we took steps to reduce our underweights to Tesla and Alphabet (GOOG)(GOOGL), while continuing to maintain active weights in Amazon.com (AMZN) and Meta Platforms (META). Given another year of triple-digit price returns for Nvidia, we find the risk-reward skew in the stock to be more balanced and now have a modest underweight position in the stock relative to the index.
The Strategy’s more defensive positioning was the primary detractor during the quarter, highlighted by our exposure to the underperforming health care sector. Our health care holdings suffered from a combination of negative investor sentiment toward managed care holding UnitedHealth Group (UNH) and sluggish biotechnology and pharmaceutical R&D spending negatively impacting portfolio holding Thermo Fisher Scientific (TMO). Despite weak recent performance, we continue to believe that health care offers durable growth trends and adds resilience to the portfolio.
Portfolio Positioning
We took advantage of that negative sentiment to establish a new position in ICON, a leading contract research organization (CRO) that handles clinical trials for biopharmaceutical companies. The CRO industry has experienced multiple compression in recent years, driven by slowing pharma and biotech spending by large clients, resulting in a meaningful dislocation in ICON’s multiple. We believe current growth is below normal and should revert toward historical levels in the coming years. ICON is a strong player in the CRO industry demonstrating consistent share gains with a strong management team.
“Despite weak recent performance, we continue to believe health care offers durable growth trends and adds resilience to the portfolio.”
Similarly, we used a temporary price dislocation caused by disappointing clinical trial results to purchase shares of Novo Nordisk (NVO), a Danish-based leader in diabetes and obesity treatments. Novo’s Wegovy semaglutide drug was first to market among the new generation of obesity drugs; however, the company has lost market share to portfolio holding Eli Lilly (LLY) due to delays in scaling up production volumes and superior weight loss results demonstrated by Lilly’s tirzepatide drugs. While the initial market reaction to Novo’s more enhanced CagriSema weight loss treatment was negative, we believe this is a more potent formulation that can better compete with Lilly’s suite. With Novo poised to have a better product portfolio and improved supply position, we find the company’s valuation very attractive given the large secular growth trends behind the diabesity market.
We also reduced the Strategy’s consumer discretionary underweight with the purchase of peer-to-peer lodging marketplace Airbnb (ABNB). Travel in aggregate is an attractive end market with Airbnb’s alternative accommodations segment gaining share in the industry. The company’s marketplace business model is one we are familiar with given our investments in Uber Technologies (UBER) and Amazon.com (which operates both a marketplace and fulfillment model) and find attractive due to high margins and returns on investment for these businesses. Following a period of slowing travel demand at Airbnb, which we view as largely cyclical, and a commensurate reduction in growth estimates and valuation, we believe the stock offers an attractive risk-reward tradeoff for a high-quality, stable growth business.
After previous trims to the position, we closed out of utility and renewable energy producer NextEra Energy (NEE) during the quarter. We expect the incoming Trump administration to increase uncertainty around renewables demand and subsidies, which could drive less upside over the next couple of years. Additionally, we modestly trimmed our positions in Netflix (NFLX), Accenture (ACN) and Intuitive Surgical (ISRG) after strong recent performance.
Outlook
The Strategy and the Russell 1000 Growth Index are coming off two years of historically robust performance, with healthy double-digit price returns in both 2023 and 2024. We do not expect such strong results to continue every year and have positioned the Strategy for the inevitable periods of turbulence that are the natural course of equity markets. High expectations could pose the greatest risk to our asset class going forward as valuations of most large cap indexes are above average levels and market positioning is bullish. The selloff at year-end, triggered by the Fed’s acknowledgment that inflation remains a risk and that the scope of future rate cuts could be limited, may serve as a warning that stocks could face more headwinds than are currently priced in.
The potential impacts of economic policies from the incoming Trump administration are also hard to assess (Exhibit 2). We are spending time evaluating how tariffs could impact not just our multinational holdings but all of the companies in the portfolio. We also see the prospect of reduced regulation as a possible benefit to many of our holdings but, as we saw in Trump’s first term, campaign rhetoric does not always make it into legislation.
Exhibit 2: Tariff Turbulence?
With the Magnificent Seven capping another very strong year, unless their profits increase dramatically, we see more compelling valuations among growth companies outside of that cohort. Software stocks, for instance, have lagged over the last 12 months versus semiconductors but are now showing signs of modest improvement and product cycle innovation is accelerating. We also see innovation occurring beyond technology-related businesses. One area we are excited about is medical devices, where portfolio holding Intuitive Surgical is making significant strides in providing feedback to surgeons using its robotic instruments. AI is clearly a megatrend that we are monitoring closely to gauge the next phase of use cases and impact both to technology-oriented businesses and to those in more traditional industries.
We are excited about the year ahead as we believe it will provide opportunities to benefit from playing both offense and defense with our portfolio construction. This is probably the biggest upshot of taking a diversified approach across our three buckets of growth, allowing us to take advantage of market conditions while leaning on balance to promote consistency through the difficult periods.
Portfolio Highlights
The ClearBridge Large Cap Growth ESG Strategy underperformed its Russell 1000 Growth Index benchmark in the fourth quarter. On an absolute basis, the Strategy delivered positive contributions across five of the 10 sectors in which it was invested (out of 11 sectors total). The primary contributors to performance were the consumer discretionary and information technology (IT) sectors while the health care and industrials sectors were the main detractors.
Relative to the benchmark, overall sector allocation and stock selection detracted from performance. From a sector allocation perspective, overweights to health care and industrials and an underweight to consumer discretionary hurt results. From a stock selection perspective, IT, financials and utilities were detractors from performance while selection in the real estate sector proved beneficial.
On an individual stock basis, the leading absolute contributors to performance were Amazon.com, Nvidia, Netflix, Visa (V) and Tesla. The primary detractors were Uber Technologies, Thermo Fisher Scientific, UnitedHealth Group, ASML (ASML) and Eli Lilly.
ESG Highlights: Public Equities Amplifying Positive Impact
Large companies with complex global operations may sometimes present challenges for sustainability-minded investors. In some cases, because a larger company’s business is more complex than smaller, pure play companies focused on one particular sustainability need (addressing unmet medical needs or enabling renewable energy, for example), its sustainability contributions might be misunderstood or overlooked. Yet some well-known companies can have lesser known sustainability strengths, and these may be all the more impactful due to their large scale. The importance of scale represents a key tenet of ClearBridge’s approach to ESG integration, as companies can make a positive impact simply because of their global reach, their deep supply chains and the depth of their involvement in the communities in which they operate.
A mega cap company like Amazon is a complex and very large company that may seem difficult to own in sustainable portfolios, as investors might be concerned about its overall carbon footprint and environmental impact, as well as working conditions, given the size and speed of the workforce. Amazon has drastically improved its capital allocation and profitability since 2022 under new CEO Andy Jassy; much of this has been driven by ongoing efforts at margin improvement through retail regionalization, scaling its advertising business and improving costs. Complementing these fundamental and governance improvements is Amazon’s growth as company for which sustainable improvements strengthen the business case, with potential for positive change that benefits multiple stakeholders (employees, customers and shareholders).
Since 2019, ClearBridge’s sector analysts have been engaging Amazon on the most material and relevant activities that could pose risk to the company in terms of operations and societal impact. These areas include climate change and climate targets; labor topics such as worker health and safety and unionization; packaging and materials; responsible AI; and disclosure. During our multiyear engagements, Amazon has agreed to disclose more data around each of these issues. In addition, Amazon reaches out to us throughout the year (and vice versa) to consult us on its sustainability progress and goals. Our most recent engagement, in September 2024, was on climate strategy and covered science-based targets, last-miles-driven, renewables and EV investments and AI power needs.
Sustainability disclosures are significant for shareholders as they help benefit the bottom line over the long term, and Amazon’s progress on several sustainability initiatives, such as reducing and innovating on packaging materials and increasing their circularity, are meaningful considering the scale of its operations. Amazon is the second-largest private employer in the U.S., with over 1.5 million employees: increasing wages, providing immediate family benefits and free tuition, and focusing on worker safety at these volumes positively impacts their many employees. The company delivers over 600 million packages per year with less materials and filling. It uses machine learning algorithms to determine the most efficient packaging for each order and so it can minimize empty space in boxes and optimize shipments to require less space in vehicles, reducing the number of vehicles on the road (Exhibit 3). AWS, meanwhile, is the largest cloud provider in the world, and is designing the latest protocols on addressing responsible AI. We believe progress made on these sustainability topics will have a material positive impact.
Exhibit 3: Amazon Reductions in Single-Use Plastic and Packaging Weight
Source: “How Amazon is improving packaging and boosting sustainability,” Oct. 2024, Amazon.
More Than a New Coat of Paint
As the world’s largest paint and coating company, Sherwin-Williams (SHW) may suffer from negative sustainability perceptions due to their paint products being derivatives of petrochemicals like propylene. The industry has, however, been increasingly replacing hydrocarbon-based solvents with water-based ones, which have no harmful volatile organic compounds (VOCs) — in particular architectural paints, which are two-thirds of Sherwin-Williams’s business. Some waterborne solvent products made by Sherwin-Williams and others include air-purifying and sanitizing paints that reduce VOC levels from sources such as carpeting, cabinetry and fabrics in addition to fighting bacteria.
Sherwin-Williams further distinguishes itself with a sustainability-forward salesforce that helps its customers become more efficient. It stands out as an engaged supplier to its customers, providing education and recommendations on best practices using its products that can help its customers overcome labor shortages with paints that require fewer passes, for example, and use less material. In a recent engagement with the company, we also learned how it supports new accounts (small business owners) with consulting resources such as the digital infrastructure, invoices and accounting basics needed for new contracting businesses to succeed long term.
In terms of how to recycle or properly dispose of excess paint, Sherwin Williams volunteers many of its stores across the U.S. as drop-off locations for unwanted or leftover paint through its partnership with PaintCare, a nonprofit organization.
While the company’s execution on its stated sustainability goals such as carbon emission reductions has been slower than might be hoped, we recognize such large goals take time. Upgrading LED lighting kits for all paint store color displays, investing in renewable energy to power its facilities and growing its paint recycling program are positive signposts for Sherwin-Williams, as its recently appointed CEO — a woman (only 6% of CEOs at the companies in the S&P 500 are women),1 — continues to foster a winning culture of product innovation and service excellence with positive environmental and social impacts.
Change Should Start with Industry Leaders
Modern clothing manufacturing and retail is often considered riddled with environmental and social problems such as resources use, waste, pollution, overwhelmed landfills, child labor and unfair labor practices. However, a clothing manufacturer leader like Inditex is actually an agent of change and improvement in a problematic industry. We believe change should start with industry leaders rather than with fringe or marginal players, and ClearBridge is following how a clothing behemoth like Spain-based Inditex, best known for its Zara brand, is using its leadership to improve its ESG rankings among its peers and benefit the entire industry.
Examples of Inditex’s environmental leadership include its use of sustainable fibers with low impact on the environment, its innovation in next-generation fibers and its use of recycling. Among its short-term goals are 100% responsibly sourced linen (it reached 100% for cotton in 2023) and a 25% reduction in water use by 2025. For 2030 it aims to improve biodiversity across 5 million hectares, reduce emissions by 50% across total product life from design to recycling (and by 90% by 2040), and move to 100% fibers with low impact on the environment.
Social leadership is equally important: Inditex is dedicated to remedying the poor social image of the industry with a comprehensive audit of all external suppliers. This will affect millions of people. The company is already a recognized leader for its internal human resources credentials for talent development, diversity and engagement of its 170,000 employees. It is now turning its focus outward on the entire ecosystem for responsible clothing manufacturing. Its “Workers at the Centre” program for supply chain management involves due diligence on all 1,700 suppliers, inspecting human rights, living wages, respect, and health and safety. It has spoken with 1.5 million people so far with the goal to reach 3 million people by 2025. Monitoring visits improved from 540 in 2022 to 820 in 2023.
While these improvements are laudable, we recognize there is still a lot of progress to be made, and some commitments could be made more credible with more detail provided on how they’ll be met. Yet given the extreme fragmentation of the fashion industry, we believe Inditex’s scale and forceful implementation of better sourcing and manufacturing should have an amplified positive impact on the whole industry’s supply chain.
ClearBridge Large Cap Growth ESG Strategy Q4 2024 Commentary
pingingz/iStock via Getty Images
By Erica Furfaro & Margaret Vitrano
Seeking Sustainability Improvements at Scale
Market Overview
Despite inklings of a market broadening in the fourth quarter sparked by Donald Trump’s election victory and further interest rate cuts from the Federal Reserve, the post-election rally proved short-lived and momentum-led with relatively narrow leadership. The S&P 500 Index (SP500)(SPX) advanced 2.41% in the quarter to finish 2024 up 25.02%, completing the best back-to-back years for the index since 1998. The benchmark Russell 1000 Growth Index (RLG) jumped 7.07% for the quarter and 33.36% for the year, easily outdistancing all other parts of the U.S. equity market.
While small cap, value and cyclical shares were bid up in the aftermath of Trump’s win, which included a Republican sweep of Congress, growth stocks reasserted control by quarter’s end. The RLG topped the Russell 1000 Value Index by 905 basis points for the quarter and 1,900 bps for the year while the Russell Midcap Growth Index was the best quarterly performer overall, rising 8.14%.
As they have done for most of the last several years, the Magnificent Seven dominated broad market returns, accounting for 74% of the RLG’s performance in the quarter and 68% for the year. Nvidia (NVDA) continued to ride the momentum of its leading position as the key supplier of chips for AI applications, rising more than 170% in 2024, while Tesla (TSLA) roared back in the fourth quarter on strong financial results and the coattails of Elon Musk’s close association with the incoming Trump administration. Meanwhile, most gauges of investor sentiment, including the Investors Intelligence Bull/Bear Ratio, Citigroup’s (C) Panic-Euphoria model, as well as current put/call ratios, show elevated levels of bullishness (Exhibit 1).
Exhibit 1: Market Optimism Elevated
The ClearBridge Large Cap Growth Strategy carefully manages its mega cap exposure to promote diversification, control risk and promote long-term consistency. We have always said it would be difficult to keep pace in a high-beta market when the index is up 30%. While strong stock selection enabled the Strategy to outpace the RLG in 2023, the offensive market posture and continued historical levels of market concentration for the Magnificent Seven were headwinds to our diversified approach, most notably in the fourth quarter.
For the quarter, our portfolio overweight in health care, an underweight position in Tesla and lack of exposure to Broadcom (AVGO) drove the majority of relative underperformance versus the index. Throughout 2024, we took steps to reduce our underweights to Tesla and Alphabet (GOOG)(GOOGL), while continuing to maintain active weights in Amazon.com (AMZN) and Meta Platforms (META). Given another year of triple-digit price returns for Nvidia, we find the risk-reward skew in the stock to be more balanced and now have a modest underweight position in the stock relative to the index.
The Strategy’s more defensive positioning was the primary detractor during the quarter, highlighted by our exposure to the underperforming health care sector. Our health care holdings suffered from a combination of negative investor sentiment toward managed care holding UnitedHealth Group (UNH) and sluggish biotechnology and pharmaceutical R&D spending negatively impacting portfolio holding Thermo Fisher Scientific (TMO). Despite weak recent performance, we continue to believe that health care offers durable growth trends and adds resilience to the portfolio.
Portfolio Positioning
We took advantage of that negative sentiment to establish a new position in ICON, a leading contract research organization (CRO) that handles clinical trials for biopharmaceutical companies. The CRO industry has experienced multiple compression in recent years, driven by slowing pharma and biotech spending by large clients, resulting in a meaningful dislocation in ICON’s multiple. We believe current growth is below normal and should revert toward historical levels in the coming years. ICON is a strong player in the CRO industry demonstrating consistent share gains with a strong management team.
Similarly, we used a temporary price dislocation caused by disappointing clinical trial results to purchase shares of Novo Nordisk (NVO), a Danish-based leader in diabetes and obesity treatments. Novo’s Wegovy semaglutide drug was first to market among the new generation of obesity drugs; however, the company has lost market share to portfolio holding Eli Lilly (LLY) due to delays in scaling up production volumes and superior weight loss results demonstrated by Lilly’s tirzepatide drugs. While the initial market reaction to Novo’s more enhanced CagriSema weight loss treatment was negative, we believe this is a more potent formulation that can better compete with Lilly’s suite. With Novo poised to have a better product portfolio and improved supply position, we find the company’s valuation very attractive given the large secular growth trends behind the diabesity market.
We also reduced the Strategy’s consumer discretionary underweight with the purchase of peer-to-peer lodging marketplace Airbnb (ABNB). Travel in aggregate is an attractive end market with Airbnb’s alternative accommodations segment gaining share in the industry. The company’s marketplace business model is one we are familiar with given our investments in Uber Technologies (UBER) and Amazon.com (which operates both a marketplace and fulfillment model) and find attractive due to high margins and returns on investment for these businesses. Following a period of slowing travel demand at Airbnb, which we view as largely cyclical, and a commensurate reduction in growth estimates and valuation, we believe the stock offers an attractive risk-reward tradeoff for a high-quality, stable growth business.
After previous trims to the position, we closed out of utility and renewable energy producer NextEra Energy (NEE) during the quarter. We expect the incoming Trump administration to increase uncertainty around renewables demand and subsidies, which could drive less upside over the next couple of years. Additionally, we modestly trimmed our positions in Netflix (NFLX), Accenture (ACN) and Intuitive Surgical (ISRG) after strong recent performance.
Outlook
The Strategy and the Russell 1000 Growth Index are coming off two years of historically robust performance, with healthy double-digit price returns in both 2023 and 2024. We do not expect such strong results to continue every year and have positioned the Strategy for the inevitable periods of turbulence that are the natural course of equity markets. High expectations could pose the greatest risk to our asset class going forward as valuations of most large cap indexes are above average levels and market positioning is bullish. The selloff at year-end, triggered by the Fed’s acknowledgment that inflation remains a risk and that the scope of future rate cuts could be limited, may serve as a warning that stocks could face more headwinds than are currently priced in.
The potential impacts of economic policies from the incoming Trump administration are also hard to assess (Exhibit 2). We are spending time evaluating how tariffs could impact not just our multinational holdings but all of the companies in the portfolio. We also see the prospect of reduced regulation as a possible benefit to many of our holdings but, as we saw in Trump’s first term, campaign rhetoric does not always make it into legislation.
Exhibit 2: Tariff Turbulence?
With the Magnificent Seven capping another very strong year, unless their profits increase dramatically, we see more compelling valuations among growth companies outside of that cohort. Software stocks, for instance, have lagged over the last 12 months versus semiconductors but are now showing signs of modest improvement and product cycle innovation is accelerating. We also see innovation occurring beyond technology-related businesses. One area we are excited about is medical devices, where portfolio holding Intuitive Surgical is making significant strides in providing feedback to surgeons using its robotic instruments. AI is clearly a megatrend that we are monitoring closely to gauge the next phase of use cases and impact both to technology-oriented businesses and to those in more traditional industries.
We are excited about the year ahead as we believe it will provide opportunities to benefit from playing both offense and defense with our portfolio construction. This is probably the biggest upshot of taking a diversified approach across our three buckets of growth, allowing us to take advantage of market conditions while leaning on balance to promote consistency through the difficult periods.
Portfolio Highlights
The ClearBridge Large Cap Growth ESG Strategy underperformed its Russell 1000 Growth Index benchmark in the fourth quarter. On an absolute basis, the Strategy delivered positive contributions across five of the 10 sectors in which it was invested (out of 11 sectors total). The primary contributors to performance were the consumer discretionary and information technology (IT) sectors while the health care and industrials sectors were the main detractors.
Relative to the benchmark, overall sector allocation and stock selection detracted from performance. From a sector allocation perspective, overweights to health care and industrials and an underweight to consumer discretionary hurt results. From a stock selection perspective, IT, financials and utilities were detractors from performance while selection in the real estate sector proved beneficial.
On an individual stock basis, the leading absolute contributors to performance were Amazon.com, Nvidia, Netflix, Visa (V) and Tesla. The primary detractors were Uber Technologies, Thermo Fisher Scientific, UnitedHealth Group, ASML (ASML) and Eli Lilly.
ESG Highlights: Public Equities Amplifying Positive Impact
Large companies with complex global operations may sometimes present challenges for sustainability-minded investors. In some cases, because a larger company’s business is more complex than smaller, pure play companies focused on one particular sustainability need (addressing unmet medical needs or enabling renewable energy, for example), its sustainability contributions might be misunderstood or overlooked. Yet some well-known companies can have lesser known sustainability strengths, and these may be all the more impactful due to their large scale. The importance of scale represents a key tenet of ClearBridge’s approach to ESG integration, as companies can make a positive impact simply because of their global reach, their deep supply chains and the depth of their involvement in the communities in which they operate.
A mega cap company like Amazon is a complex and very large company that may seem difficult to own in sustainable portfolios, as investors might be concerned about its overall carbon footprint and environmental impact, as well as working conditions, given the size and speed of the workforce. Amazon has drastically improved its capital allocation and profitability since 2022 under new CEO Andy Jassy; much of this has been driven by ongoing efforts at margin improvement through retail regionalization, scaling its advertising business and improving costs. Complementing these fundamental and governance improvements is Amazon’s growth as company for which sustainable improvements strengthen the business case, with potential for positive change that benefits multiple stakeholders (employees, customers and shareholders).
Since 2019, ClearBridge’s sector analysts have been engaging Amazon on the most material and relevant activities that could pose risk to the company in terms of operations and societal impact. These areas include climate change and climate targets; labor topics such as worker health and safety and unionization; packaging and materials; responsible AI; and disclosure. During our multiyear engagements, Amazon has agreed to disclose more data around each of these issues. In addition, Amazon reaches out to us throughout the year (and vice versa) to consult us on its sustainability progress and goals. Our most recent engagement, in September 2024, was on climate strategy and covered science-based targets, last-miles-driven, renewables and EV investments and AI power needs.
Sustainability disclosures are significant for shareholders as they help benefit the bottom line over the long term, and Amazon’s progress on several sustainability initiatives, such as reducing and innovating on packaging materials and increasing their circularity, are meaningful considering the scale of its operations. Amazon is the second-largest private employer in the U.S., with over 1.5 million employees: increasing wages, providing immediate family benefits and free tuition, and focusing on worker safety at these volumes positively impacts their many employees. The company delivers over 600 million packages per year with less materials and filling. It uses machine learning algorithms to determine the most efficient packaging for each order and so it can minimize empty space in boxes and optimize shipments to require less space in vehicles, reducing the number of vehicles on the road (Exhibit 3). AWS, meanwhile, is the largest cloud provider in the world, and is designing the latest protocols on addressing responsible AI. We believe progress made on these sustainability topics will have a material positive impact.
Exhibit 3: Amazon Reductions in Single-Use Plastic and Packaging Weight
Source: “How Amazon is improving packaging and boosting sustainability,” Oct. 2024, Amazon.
More Than a New Coat of Paint
As the world’s largest paint and coating company, Sherwin-Williams (SHW) may suffer from negative sustainability perceptions due to their paint products being derivatives of petrochemicals like propylene. The industry has, however, been increasingly replacing hydrocarbon-based solvents with water-based ones, which have no harmful volatile organic compounds (VOCs) — in particular architectural paints, which are two-thirds of Sherwin-Williams’s business. Some waterborne solvent products made by Sherwin-Williams and others include air-purifying and sanitizing paints that reduce VOC levels from sources such as carpeting, cabinetry and fabrics in addition to fighting bacteria.
Sherwin-Williams further distinguishes itself with a sustainability-forward salesforce that helps its customers become more efficient. It stands out as an engaged supplier to its customers, providing education and recommendations on best practices using its products that can help its customers overcome labor shortages with paints that require fewer passes, for example, and use less material. In a recent engagement with the company, we also learned how it supports new accounts (small business owners) with consulting resources such as the digital infrastructure, invoices and accounting basics needed for new contracting businesses to succeed long term.
In terms of how to recycle or properly dispose of excess paint, Sherwin Williams volunteers many of its stores across the U.S. as drop-off locations for unwanted or leftover paint through its partnership with PaintCare, a nonprofit organization.
While the company’s execution on its stated sustainability goals such as carbon emission reductions has been slower than might be hoped, we recognize such large goals take time. Upgrading LED lighting kits for all paint store color displays, investing in renewable energy to power its facilities and growing its paint recycling program are positive signposts for Sherwin-Williams, as its recently appointed CEO — a woman (only 6% of CEOs at the companies in the S&P 500 are women),1 — continues to foster a winning culture of product innovation and service excellence with positive environmental and social impacts.
Change Should Start with Industry Leaders
Modern clothing manufacturing and retail is often considered riddled with environmental and social problems such as resources use, waste, pollution, overwhelmed landfills, child labor and unfair labor practices. However, a clothing manufacturer leader like Inditex is actually an agent of change and improvement in a problematic industry. We believe change should start with industry leaders rather than with fringe or marginal players, and ClearBridge is following how a clothing behemoth like Spain-based Inditex, best known for its Zara brand, is using its leadership to improve its ESG rankings among its peers and benefit the entire industry.
Examples of Inditex’s environmental leadership include its use of sustainable fibers with low impact on the environment, its innovation in next-generation fibers and its use of recycling. Among its short-term goals are 100% responsibly sourced linen (it reached 100% for cotton in 2023) and a 25% reduction in water use by 2025. For 2030 it aims to improve biodiversity across 5 million hectares, reduce emissions by 50% across total product life from design to recycling (and by 90% by 2040), and move to 100% fibers with low impact on the environment.
Social leadership is equally important: Inditex is dedicated to remedying the poor social image of the industry with a comprehensive audit of all external suppliers. This will affect millions of people. The company is already a recognized leader for its internal human resources credentials for talent development, diversity and engagement of its 170,000 employees. It is now turning its focus outward on the entire ecosystem for responsible clothing manufacturing. Its “Workers at the Centre” program for supply chain management involves due diligence on all 1,700 suppliers, inspecting human rights, living wages, respect, and health and safety. It has spoken with 1.5 million people so far with the goal to reach 3 million people by 2025. Monitoring visits improved from 540 in 2022 to 820 in 2023.
While these improvements are laudable, we recognize there is still a lot of progress to be made, and some commitments could be made more credible with more detail provided on how they’ll be met. Yet given the extreme fragmentation of the fashion industry, we believe Inditex’s scale and forceful implementation of better sourcing and manufacturing should have an amplified positive impact on the whole industry’s supply chain.
Erica Furfaro, Portfolio Manager
Margaret Vitrano, Portfolio Manager
Past performance is no guarantee of future results. Copyright © 2024 ClearBridge Investments. All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
Performance source: Internal. Benchmark source: Standard & Poor’s.
1https://research.com/careers/female-ceos-of-the-sp-500
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